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Saturday, October 27, 2012

One tangible pathway to fighting corruption: Increasing the disclosure by firms and politicans

While many researchers have started studying corruption, as of yet, the field is remarkably bereft of tangible policy choices that would yield reduced corruption. As I read The other side of reforms by A. K. Bhattacharya in the Business Standard, and Obtaining financial records in China by David Barboza in the New York Times (which describes the modus operandi of the New York Times'remarkable expose of corruption in China at the level of the Prime Minister, also by David Barboza), I thought there is one tangible policy lever through which we can combat corruption: Increase the transparency of companies and increase the transparency of politicians.

Transparency by firms

It is useful to think at two levels: Transparency about the activities of companies created by politicians, and transparency about the activities of the big companies that pay bribes. I am reminded of the Extractive Industries Transparency Initiative. One element of this is an attempt to change the behaviour of repressive regimes (e.g. Russia) by forcing the companies that deal with them (e.g. BP) to behave differently. Even if the politicians are irredeemably bad, we can change things by modifying the incentives of the firms that pay bribes.

In a recent post, Indian capitalism is not doomed, I argued that the markets for labour and capital are exerting pressure on firms, pushing them towards higher ethical standards even under conditions of medium grade enforcement by the State. To the extent that the firms are more transparent, their misdeeds are more likely to be exposed, and then these kinds of pressures will work more effectively.

At present, the MCA-21 database is clumsy and painful, but it's a step forward in one respect: It does yield some information about many companies. This has been of value in tracing the activities of the companies controlled by politicians and their business partners. This process needs to be carried forward in many dimensions:

At present, the P&L statement of "public" companies is publicly visible in MCA-21. This definition needs to be widened so that the P&L statement for many more companies become publicly visible.

The disclosure environment for listed companies in India is quite good. There is no quarterly balance sheet; the shareholding pattern statement is misleading; there are a few other blemishes. But the information access for listed companies is vastly greater when compared with what's in MCA-21. Many features of the disclosure regime for listed companies (where the work is led by SEBI) need to go into the disclosure regime for all companies (were the work is done by the Department of Company Affairs).

If private limited companies become more transparent, politicians will try to use trusts and limited liability partnerships for their activities. Improvements in transparency should extend to LLPs, trusts and partnership companies also.

Transparency by politicians

Alongside a push for greater transparency by firms (both the big listed companies and the firms created by politicians), we should be pushing towards greater transparency by politicians. This push towards transparency has begun, and has started yielding some results. It needs to be carried forward. The comprehensive financial lives of MPs, MLAs, and their next of kin should be in the public domain. The transparency regime should kick in when a person wins an election, and should stay in place for atleast 10 years from that starting date. Any company or LLP with shareholding of more than 1% by an MP or an MLA or their next of kin should have to comply with the comprehensive disclosure manual of SEBI for listed companies. Any trust when an MP or an MLA or their next-of-kin is a trustee should have to similarly fall into a high quality disclosure framework.

Privacy is precious

There is a tradeoff between privacy of citizens and corruption control. There is value in protecting the privacy of the business dealings of individuals. Perhaps, at the early stages in the formation of the Republic, where we're grappling with basics of governance, there is a case for violating the privacy of individuals in the quest for improved cleanliness in public life. Over the years, as the State falls into place, a greater push for privacy would be desirable.

2 comments:

noble thought but would politicians actually move towards it or take any steps that would block / vanish their current options of making easy money! Yes it is a step ahead, but then SEBI is already in place & is performing the limited work in stopping rigging or making market clean.But yes as you said - It is a step ahead.Your analogy highlights what Nandan Nilekani/ Adi Godrej meant - Implementation of IT solutions in all Govt business is important to plug the holes / stop leakage of money (to few important people hands)

@Ajay Shah Apropos your thread "the young are getting away from agriculture",I would like to tell you a few things.Well I was reading recently about a paper published by Richard Fogel that predicted about China, as China still had 50%(which I would not want to believe is so high) of the workforce in agriculture,despite the labour force shortage,China can gain about 30% of its GDP growth from inter industrial movements of workforce. WHAT he had NOT said was the demographic profile of that workforce. Now that you had mentioned in that thread of yours that only 10% of the labour force thats in agriculture can be considered "young" bracket, and the rest being the older age group. Don't you think,This, perhaps will ,therefore, not result in any sizeable gain as Fogel has predicted,and the reason for this would be China's aging population and labour force shrinkage. So thanks for throwing light on that, and clearing a lot of doubts.

Also would like to know, IF at all the CMIE data is true, regarding INDIA's shortage of Agri labour from 52% of total workforce to 31.31%. If so then where are they being absorbed? And I think India could have attained very high growth rates as a result of this,which is clearly not the case these days.

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